A national mail-order program for diabetics has become controversial. AP Photo

A dramatic cut in Medicare payments to medical suppliers, coupled with a 250-percent increase in audits, is hitting large and small firms hard, with one mail-order company revealing that it had to fire eight workers just to stay open.

The slash in payments is the result of Medicare's controversial competitive bidding program that began implementation in 2011. It was heralded as a way to cuts costs and increase competition. But bidders such as equipment suppliers and hospitals charged that it has caused layoffs, forced companies to close and delayed hospital discharges.

One example, All-States Medical Supply of Fletcher, N.C., said the firings were necessary to “keep our head above water” due to a 45-percent cut in reimbursements and surge in audits. The company described the payments as “suicide reimbursement rates.” One of the biggest complaints is that the bidding program arbitrarily sets unrealistic prices for products and services.

In a story similar to others heard around the country, the company said that it won a bid last year to provide mail-order diabetic supplies through Medicare’s Durable Medical Equipment Bidding Program. It had to hire 50 workers just to handle new demand as six million diabetics scrambled to change suppliers.

But instead of seeing a nice profit, the new reimbursements rate cut payments about 45 percent. Plus, the firm has faced a 250-percent jump in audits, which can take two and a half years to clear.

“The layoffs were a devastating decision for us, but one we had to make to keep our head above water. Medicare cut its reimbursement rates by 45 percent and it is impossible to sustain the numbers,” said Jason De Los Santos, president of All-States Medical Supply, in a statement. “This, in addition to the onslaught of Medicare audits holding hundreds of thousands of dollars in limbo, have taken its toll on us.”

Their case is an example of why industry representatives and 171 House members are trying to change Medicare’s reimbursement rates from a national system to one that recognizes local costs. It would also recognize the differences between online and bricks and mortar firms.

Tom Ryan, president of the American Association for Homecare, said, the bidding system is broken. Pointing to Mid-States, he said, “Even the bid winners are losers.”

When unveiled, the administration said moving to a limited number of mail-order firms would result in reduced payments because it assumed it would also cut waste and fraud.